Tribunal Rules in Favor of Taxpayer Appeals, Sends Working Capital Issue to TPO. Assessments Quashed for Non-issuance of Notices.

The tribunal partly accepted the appeal for AY 2008-09, restoring the working capital adjustment issue back to the TPO. For AY 2011-12, 2012-13, and 2013-14, the tribunal allowed the appeals, quashing the assessments due to non-issuance of section 143(2) notices by the competent authority.

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Issues Involved:
1. Arms Length Price (ALP) adjustment for software services.
2. Denial of working capital adjustment.
3. Validity of assessments due to non-issuance of section 143(2) notice by the competent Assessing Officer.

Issue-wise Detailed Analysis:

1. Arms Length Price (ALP) Adjustment for Software Services:
The assessee challenged the ALP adjustment of Rs. 2,50,45,534/- made by the lower authorities for software services provided to its associate enterprises (AE). The Transfer Pricing Officer (TPO), the Assessing Officer (AO), and the CIT(A) were unanimous in making the ALP adjustment. The assessee argued that the CIT(A) erred in denying the working capital adjustment rebate, which should be allowed as per various tribunal decisions. The assessee provided a chart indicating that the working capital adjustment would result in an arithmetic mean of 9.32% compared to the TPO’s determined 12.25%.

2. Denial of Working Capital Adjustment:
The CIT-DR supported the CIT(A)’s findings that the working capital adjustment proposed by the assessee was an afterthought and not substantiated with evidence. The CIT(A) agreed with the TPO’s rejection of the working capital adjustment, stating that the assessee did not provide specific reasons for the adjustment and that the TPO had rationally excluded companies with extremely high or low turnovers from comparables. The tribunal noted that the issue of working capital adjustment was also present in AY 2014-15, where the DRP directed the AO to compute the adjustment based on specific guidelines. The tribunal restored the issue back to the TPO for fresh proceedings.

3. Validity of Assessments Due to Non-issuance of Section 143(2) Notice:
For the assessment years 2011-12, 2012-13, and 2013-14, the assessee challenged the validity of assessments due to the failure of the AO in issuing section 143(2) notice. The assessee cited various judicial precedents emphasizing the mandatory nature of issuing section 143(2) notice within the prescribed time. The tribunal noted that the regular assessments were framed by the DCIT/ACIT, Circle-14(1), Kolkata, based on notices issued by the DCIT/ACIT, Circle-II(4), Chennai, which lacked jurisdiction. The tribunal concluded that the assessments were non-est in law as the notices were issued by an officer without jurisdiction, and the assessing authority in Kolkata did not issue such notices. Consequently, the tribunal quashed the assessments for these three years.

Conclusion:
The tribunal partly accepted the appeal for AY 2008-09 for statistical purposes, restoring the issue of working capital adjustment back to the TPO. For the assessment years 2011-12, 2012-13, and 2013-14, the tribunal allowed the appeals, quashing the assessments due to the non-issuance of section 143(2) notices by the competent authority. The order was pronounced in the open court on 28th September 2018.

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